CBS, Chris-Craft Reportedly Renew Merger Talks

Updated from 8:03 a.m. EST

Despite analysts' bullish outlook on a possible acquisition of Chris-Craft Industries (CCN Quote) by CBS(CBS Quote), both stocks were lower as the overall market dropped.

Chris-Craft shares were down 7/8, or 1%, to 74 1/8 in midday trading. CBS shares declined 4 5/8, or 7%, to 57 3/8. Viacom(VIA Quote), which is in the midst of merging with CBS, also fell, dropping 4 9/16, or 8%, to 55 1/16. CBS is pursuing the deal on behalf of both companies. (Chris-Craft shares closed up 3/8, or 0.5%, at 75 3/8. CBS closed down 1, or 1.6%, at 61. Viacom closed down 2 1/16, or 3.5%, at 57 9/16.)

In a report Friday, The Wall Street Journal cited people close to the matter as saying representatives for the New York-based companies met Thursday to discuss a potential deal, which could be valued at as much as $3.5 billion.

The deal could be of particular interest to Viacom, which is already partnered with Chris-Craft in the UPN TV network. In fact, a buyout of UPN by Viacom-CBS became a strong possibility once Viacom agreed to acquire CBS in September.

However, Chris-Craft, which owns 10 television stations and has $1.4 billion in cash, is reportedly not in a rush to complete the talks, which have been going on for months. A key stumbling block in a CBS/Chris-Craft deal: The $80-per-share price tag that Chris-Craft has reportedly set, analysts said. "It all depends on the value of UPN," said Christopher Ensley, analyst with Lazard Freres & Co.. "It's hard to determine the value on that because it hasn't made any money."

That said, "It makes more sense for CBS to be the buyer than anybody else," according to Ensley. "It would give CBS duopolies in seven of the top 10 markets."

CBS President and CEO Mel Karmazin, who will become president of Viacom-CBS when that merger closes, likely by the end of the March, pursued a duopoly strategy in building Infinity Broadcasting, his radio network, and he has indicated he plans on a similar strategy to build Viacom-CBS, Ensley said.

The networks have increasingly looked for other means to distribute programming in recent years, as production costs have shot up. Owning TV stations outright has proven to be the most reliably profitable distribution channel. "It's a great way to leverage costs," Ensley said.

By gaining additional stations, CBS would be able to repurpose its owned programming, especially in areas such as news and sports, and gain additional ad revenue streams. "It's pretty clear that CBS would love to have the New York and L.A. stations," said David Londoner, media analyst with Schroder & Co. "That would give CBS duopolies in both markets." CBS added another source of programming when it acquired syndicated TV company King World Productions last year.

The UPN stations that CBS would acquire could benefit from such a deal as well. "There are a lot of ways that UPN stations could benefit from CBS programming, especially in daytime and afternoon," Ensley said. "And Viacom is no slouch when it comes to programming either." Among other things, Viacom owns movie studio Paramount Pictures and cable networks MTV and Nickelodeon.

In August, the Federal Communications Commission loosened so-called duopoly rules that prevented companies from owning more than one TV station in individual markets. That decision precipitated Chris-Craft's decision to put itself on the bloc last fall. While a few deals have resulted from the FCC decision, including NBC's agreement to acquire a 32% stake in Paxson Communications (PAX Quote), which will give the television network added distribution through the Pax TV stations and affiliates, a CBS/Chris-Craft agreement could open the floodgates.

Because FCC rules prohibit one company from reaching more than 35% of the TV audience, CBS-Viacom will likely have to spin out as many as 18 of its stations to get below that threshold should it acquire Chris-Craft, Ensley said. "This deal almost has to happen for others to happen."

Schroders' Londoner could see a more modest transaction between Chris-Craft and CBS. The merged Viacom-CBS, which would already be roughly 6% over the 35% limit even without the Chris-Craft stations, could simply swap a group of stations in exchange for Chris-Craft's New York and Los Angeles stations, with cash thrown in.

Meanwhile, acquisition talks between Chris-Craft and News Corp (NWS Quote) have ended and Tribune Co. (TRB Quote), another potential buyer, is not expected to go after a deal.

Chris-Craft would not comment on the Journal report. CBS did not immediately return calls.